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Companies across sectors and geographies are turning increasingly to an internal carbon price to prepare for climate-related business risks, and guide and fund investments in low-carbon solutions.

Setting a price on carbon encourages companies to reduce their emissions, and carbon pricing is therefore essential to achieve the central goal of the Paris Climate Change Agreement, which is to limit global temperature rise to as close as possible to 1.5 degrees Celsius.

A new brief published by the Center for Climate and Energy Solutions (C2ES), The Business of Pricing Carbon, examines how companies are using internal carbon pricing – either through an explicit fee on business-related carbon emissions that can fund carbon-reducing projects, a theoretical “shadow” price to guide investment decisions, or a hybrid of these approaches.

For example, Microsoft business groups pay a fee, from $5 to $10 per metric ton, on the carbon emissions associated with their electricity consumption and employee air travel. The revenue is used to buy renewable energy, increase energy efficiency and e-waste recycling, and buy carbon offsets. In 2015, Microsoft received a Momentum for ChangeLighthouse Activity Award for its innovative carbon program.

Among the brief’s key findings:

Companies are using internal carbon pricing to achieve multiple goals. Among the reasons for an internal carbon price are: to reduce emissions, respond to shareholder concerns about climate-related business risks, build resilient supply chains and portfolios, increase competitiveness, prepare for future regulations, and demonstrate corporate social responsibility.

Just having an internal carbon price sends an important signal. Prices range broadly, from $2 to $893 per metric ton of carbon dioxide equivalent. For a carbon fee, the price itself may be less important than the business-relevant signal it sends to employees and business units that carbon emissions have costs and need to be managed. For a shadow price, the price may need to be higher than current government levels and increase over time to affect long-term decisions. (The High-Level Commission on Carbon Prices recommends $40-$80 per metric ton by 2020 and $50-$100 per metric ton by 2030.)

Companies have choices in how to price carbon. There is no one best way to internally price carbon; each has its benefits and challenges. Companies are using approaches such as a carbon fee, shadow pricing, implicit carbon pricing, and/or combining these strategies. A company should adopt the approach that aligns with its objectives. For example, a carbon fee can engage employees and help meet emissions reduction targets while a shadow price can inform long-term investment decisions.

Corporate carbon pricing is only one tool to address climate-related risks. Corporate carbon pricing alone will not be sufficient to ensure a transition to a global low-carbon economy. These approaches must be complemented with other corporate greenhouse has reduction strategies.

“Many companies are leading the way toward a low-carbon future. They see the risks of climate impacts to their businesses and the opportunities to create jobs and increase their competitiveness through clean and efficient energy,” said C2ES President Bob Perciasepe. “Internal carbon pricing is one innovative tool more companies can explore to show sustainability leadership to their shareholders, employees, and customers.”